Sorry, but PayPal has not done wrong here. Credit cards and PayPal accounts get stolen, that's not unusual and simply not 100% preventable.
PayPal/eBay offers, essentially, free insurance against fraud through the Seller Protection Policy. To take advantage of this insurance, you have to ship to the buyer's confirmed address. Whoever took over the account and spent someone else's money can't easily change that address without the real owner or PayPal noticing.
PayPal is completely unambiguous about how this works. It's in the receipts, it's on the thank-you pages, it's in the policy descriptions, it's in the FAQ's, etc. Here's a screenshot of a PayPal receipt for a received payment, if you haven't seen one recently. It's brightly highlighted right up top what you should do to stay within the protection of the free insurance.
The OP got scammed. PayPal got scammed too. They don't have the stolen funds he was paid with. If the payment was funded by credit card, PayPal not only doesn't have the money but also paid a chargeback fee on it. They're actually willing to use their own money on top of that to pay for the stolen items if the seller shipped them to the PayPal account's address -- great! But the OP didn't, so he's in the same place he'd be if he were paid with a bad check or directly with a stolen credit card -- all he can do is take the scammer to court, if he's ever found.
Re the final line: "I urge PayPal to do the right thing and correct this issue immediately, lest I be driven to seek legal options to recover what I believe is legally owed to me." The party that owes him money is the person that placed the bid on eBay, not the means by which he made a fraudulent payment. When someone pays a store with a bad check, it's not the bank that's sued, it's the check writer.
As someone who once tried to take advantage of the Seller Protection Policy, let me tell you that even if you follow all the rules, it's still a steep uphill battle.
Any halfway intelligent criminal can easily force you into a position that the policy doesn't cover. For example, shipping you back an empty box and claiming they returned the item.
Paypal is such an antagonistic entity that I cannot imagine electing to use it if given any other option. Even if there was no other option, I cannot imagine agreeing to use it for more than more than the price of a few t-shirts. They have demonstrated repeatedly, over the course of _years_, that they have zero interest in rectifying problematic transactions, will freeze and possibly take possession of funds in your account without warning, and are famously resistant to having a meaningful, person-to-person, non-form letter dialogue.
I really am baffled paypal still gets as much use as it does.
How would you buy or sell a computer on eBay? Cash, checks and money orders provide no protection for the buyer against sellers that don't actually have the product. Credit cards and any 3rd party processor that accepts them have the exact same problems as PayPal.
"To qualify for eBay Seller Protection, be sure to: Use a shipping method that provides tracking information and/or valid delivery confirmation to the address in the PayPal transaction details or eBay order details page."
It sucks that you got scammed, and I hope you get the guy who did it, but you'll need to get someone other than PayPal / eBay involved. It's probably just going to waste your time and reduce your chances of catching him if you keep trying to go through either of them.
PayPal/eBay offers, essentially, free insurance against fraud through the Seller Protection Policy. To take advantage of this insurance, you have to ship to the buyer's confirmed address. Whoever took over the account and spent someone else's money can't easily change that address without the real owner or PayPal noticing.
PayPal is completely unambiguous about how this works. It's in the receipts, it's on the thank-you pages, it's in the policy descriptions, it's in the FAQ's, etc. Here's a screenshot of a PayPal receipt for a received payment, if you haven't seen one recently. It's brightly highlighted right up top what you should do to stay within the protection of the free insurance.
http://i.imgur.com/QhrBm.png
The OP got scammed. PayPal got scammed too. They don't have the stolen funds he was paid with. If the payment was funded by credit card, PayPal not only doesn't have the money but also paid a chargeback fee on it. They're actually willing to use their own money on top of that to pay for the stolen items if the seller shipped them to the PayPal account's address -- great! But the OP didn't, so he's in the same place he'd be if he were paid with a bad check or directly with a stolen credit card -- all he can do is take the scammer to court, if he's ever found.
Re the final line: "I urge PayPal to do the right thing and correct this issue immediately, lest I be driven to seek legal options to recover what I believe is legally owed to me." The party that owes him money is the person that placed the bid on eBay, not the means by which he made a fraudulent payment. When someone pays a store with a bad check, it's not the bank that's sued, it's the check writer.